Sterling will be reliant on news from elsewhere this week
A weekly currency market update from Carl Hasty, director of Smart Currency Business.
So far this month sterling has gained a little bit of ground against the US dollar, underpinned by the US not raising interest rates, and sideways against the euro, having lost significant ground to the euro in the second half of August. Even though the US Federal Reserve has indicated that a rate hike could still take place before the end of 2015, sterling finished the week close to a one-month high.
The week ahead promises to be relatively quiet for sterling, with little in the way of economic data releases from the UK. Housing inflation data on Monday is likely to pass by largely unnoticed as it only reports on asking prices, which can differ significantly from actual selling prices. Public sector net borrowing figures on Tuesday are likely to carry more weight, with last month’s deficit turning positive.
Elsewhere, investors will be paying particular attention to the Eurozone, where European Central Bank (ECB) President Mario Draghi will be speaking on Wednesday. With sterling recently underperforming over the past month against the euro, this speech provides an opportunity for sterling to recover some ground if he continues to emphasis the ECB’s programme of quantitative easing.
Will Eurozone data this week generate euro weakness?
The euro remained relatively flat against sterling but struggled against the US dollar on Friday, pulling away from almost four-week highs as investors continued to ponder the Federal Reserve’s decision to hold interest rates for the time being.
Then this weekend we had the fifth Greek general election in six years and the second one this year. There was no change with the Syriza party being re-elected and reforming the same coalition government. With debt renegotiations looming you hope that all participants have learnt the lessons of last time and sort out an agreement quickly. If not, I imagine we will see euro weakness.
This week, there has already been Producer Price Index (PPI) data from Germany, which was forecast to fall to a negative -0.2% from 0% last month. On Tuesday the Eurozone’s Purchasing Managers Index (PMI) is likely to be a key metric signalling the single currency’s performance. European Central Bank (ECB) President Mario Draghi will then be speaking on Wednesday. Consumer confidence data from Germany on Thursday is likely to be final major news from the markets, and will be closely scrutinized given the worries over China, which is also likely to fall slightly from last month’s figure.
US dollar weakens slightly against sterling after interest rate decision
After a lacklustre US Federal Rate decision, i.e. no interest rate increase, and accompanying meeting minutes, the US dollar weakened slightly against sterling due to worries regarding China’s recent struggle and uncertainties over the world economy. Following the interest rate decision we have a handful of US Federal Reserve members speaking this week, which should touch upon the latest decision and minutes. Investors will be analysing these for indications of any underlying Federal Reserve sentiment on whether a hike will happen sooner or later.
This week’s data releases include existing home sales figures on Monday, where a decline is expected from the previous month’s figures, and the flash manufacturing Purchasing Managers’ Index (PMI) on Tuesday, showing continued growth in the usually strong sector. Focus of the week will then be towards Thursday and Friday, with core durable goods and final growth figures released respectively. The former is expected to drop against the previous month’s and just about show a positive figure – this is unsurprising, given that this has struggled since the start of last year. Final second quarter growth figures are expected to remain the same as the initial release, showing the US’s best growth in three quarters.
US decision benefits South African rand and New Zealand dollar
The South African rand strengthened against the US dollar and sterling on Friday, thanks to the US Federal Reserve’s decision to hold interest rates. Out this week are inflation data and an interest rate decision by the South African Bank Reserve Bank. Both are likely to impact the rand, and cause market fluctuations.
The New Zealand dollar gained some strength on Friday as the news that the US interest rates are likely on hold until December helped currencies which are commodity-driven. However, it weakened shortly afterwards, as the week’s disappointing growth data for New Zealand restrained demand for the currency. There was some brighter economic news for New Zealand, though, with the nation’s consumer confidence index increasing from 109.8 in August to 110.8 in September. Next week we look forward to imports, exports and trade balance data out of New Zealand, which have the potential to cause some movement in the market.